Sao Martinho SA
BOVESPA:SMTO3
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Sao Martinho SA
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Good afternoon, ladies and gentlemen, and thank you for waiting. Welcome to São Martinho S.A. conference call to discuss the results of the first quarter of the '18/'19 harvest.
Today with us, we have Mr. Felipe Vicchiato, CFO and Investor Relations Officer; and Mrs. Aline Reigada, São Martinho's Investor Relations Manager. The audio and slides of this call are being simultaneously broadcast on the company's website, www.saomartinho.com.br/ir. [Operator Instructions]
We would like to inform you that some information conveyed in this call are forward-looking statements about future expectations and, as such, they are subject to known and unknown risks and uncertainties, which could cause the company's actual results to differ materially from those expressed in these forward-looking statements.
Now we would like to turn the floor over to Mr. Felipe Vicchiato, who will start the presentation. Thank you.
Good afternoon, everyone, and thank you for being present in our call about the earnings of the first quarter of the 2019 year -- crop year.
Let's start on Page #3, our operating highlights, crushing of the -- and TRS, et cetera; financial highlights of the quarter; indebtedness; Then the hedge position for dollar and sugar; and a little bit about the ethanol market and what we saw up to the end of this crop.
On Page 4, the operational highlights. The crushed volume of São Martinho grew by 8.8% in the first quarter vis-à-vis the previous quarter, 9.5 million tons, with a percentage of own cane, 9.4% increase; and other, 7.5%. And these 9.5 million tons represent 46% of the guidance that we forwarded in mid-June. And the target of the company is to crush 25.5 million tons of sugar in this crop year.
In the quarter, we produced 406,000 tons of sugar, a drop of over 20% (sic) [ over 19% ] vis-à-vis the 504,000 that we produced last year, basically because of the decision made by the company, changing the mix, producing more ethanol. And in the production of ethanol, in the first quarter, we had 486 cubic meters with an increase of 47.8% vis-à-vis the previous crop year. And energy, going up 9% in the quarter having 327,000 megawatt hours of exported energy.
In terms of our guidance, we have already produced 41% of the production estimated for sugar and 43% of the estimated ethanol production. From June on, the positive surprise is the TRS because our TRS is 2 kilos more than we had estimated in the guidance, or 5.5% more than it was at the first quarter of the previous year. And the reason for this improvement is because of the dry season, the dry weather that we see since the beginning of the crop year. On the other hand, the impact, there is a productivity impact in tons per hectare in the first quarter, 79.6 and in the first quarter of last year, it was 86 tons per hectare, a drop of 7.4%. And this drop of TCH was already in the guidance that we sent to the market in mid-June [ on ] and if it were not for this very dry weather, we should be crushed something close to 23 million tons, which was our figure at the end of last year.
But as we had this dry weather, when we sent you the guidance, it was -- well, now it is 20.5. And this drop in yield is basically offset by the TRS but not totally offset because we understand that the sector is suffering proportionately. And the crop year should be closed very early mid-October.
On the next page, Page #5, we see the financial highlights of the company in the quarter. Starting with our net revenue, dropping by 11.1%, going from BRL 868 million to BRL 770 million in 1Q '19. And this drop was basically due to the lower volumes sold of sugar in the quarter, 27.8% less, and a drop of 22.9% in the average price of sugar quarter-on-quarter.
I would like to remind you that the first quarter of last crop year was the best quarter from the viewpoint of prices, average prices for sugar. So when you compare quarter-on-quarter, you have this problem because you have the best and then you compare it to a very weak quarter because of the drop in sugar that we have been seeing over the last 12 months.
On the other hand, ethanol average price, almost 8% up. And we increased, by almost 50%, the volume sold of ethanol, 145 to 216 cubic meters. And the increase in the volume of ethanol comes from the higher production of ethanol in the crop year. And of course, we adapt and we sell when demand is a little bit stronger, which is basically what happened in June when we were able to distribute a lot of ethanol for the domestic market.
Cogeneration, 8.8% (sic) [ 8.5% ] increase in the average price year-on-year, cogeneration, due to the improvement of the spot prices that happened in the last month of the quarter and a volume 5% higher in cogeneration in the quarter given my higher rate of crushing.
Adjusted EBITDA of the company dropped 15% to BRL 401 million. And the EBITDA margin, 52%; adjusted EBITDA (sic) [ EBIT ], BRL 198 million, with a margin of 25%.
Net income before taxes dropped 4% from BRL 181 million (sic) [ BRL 161 million ] to BRL 153 million, and this drop is a bit vis-à-vis -- well, this results from a financial expenditure comparing 1Q '19 to 1Q '18.
We have the inventories here on this slide and the estimate for the sale of sugar and ethanol for the next few quarters. We see that in the case of sugar, we have a remaining volume to be exported close to 741,000 tons of sugar, 75.6% of the volume available of the total volume of the guidance. So we have about 25% per quarter to be sold.
And in the case of ethanol, we still have 87% of the volume produced to be sold in the next few quarters. And the reason why we have more ethanol than sugar, one of them is because we had higher carryover inventories from March through April, and also because historically, the company has between 60% and 65% of total production of ethanol in the second half of the crop as of October of each calendar year.
On the next slide, Slide #6, we talk about our indebtedness. And the gross debt of São Martinho was BRL 4.2 billion with cash of BRL 1.6 billion. The total net debt, BRL 2.6 billion.
Net debt/EBITDA 1.4x, an increase of 12%, vis-à-vis net debt/EBITDA in March '18.
On the bar chart, you have the debt evolution in the same period. And the main reason for the increase were working capital that was used in the quarter, basically because of the sugar and ethanol inventories and the exchange rate variation, noncash effect in the short-term in real.
Coming -- well, because of our percentage of debt in dollars, we have 29%, $300 million approximately. That suffered with the exchange rate variation. From March through June, it went from $330 million to $380 million, $385 million. So this exchange variation is via shareholders' equity and then has a direct impact on the company's debt.
On the debt schedule below, we see that we had BRL 1.6 billion in cash, and in the next 2 years, we have maturities, something close to BRL 1.2 billion, BRL 1.3 billion. That is to say the cash accounts for almost 2 years of debt that is maturing. So it's a very comfortable situation and we do not need to refinance debt now neither in the next year.
The company in the last quarter was able to make some adjustments regarding the rollover of debt in terms of cost and the debt profile of the company is one of the best in the last 4 years, with an average maturity that is longer, a more balanced debt in foreign currency and, together with the commercial area, matching sugar and dollar.
When we look at the debt maturities, it's important to mention that in the next couple of years, a small part of the debt maturing in the next 12 months, 8% of our debt is in dollars. And in 12 to 24 months, only 16% in dollars. So it's a very comfortable situation in order to cope with the volatility that we see in the exchange rate in the last few months.
On Page #7, we have the hedge position for sugar and dollar for the '18/'19 crop year. On 30th of June, it was 504,000 tons of sugar at USD 14.49 per pound. And this is equivalent to 87% of own cane to be sold in the next 3 quarters. And in real, the figure is close to BRL 1,126 per ton. As you have seen in our release, we put the cash cost for sugar, and our cash cost closed at BRL [ 850 ] [ sales ] per ton approximately. So we still have a very relevant margin for sugar as well.
For the '19/'20 crop year, we have already started to hedge. On June 30, we had 110,000 tons hedged of sugar at USD 13.93, and this is equivalent to BRL 1,187 per ton and it means 16% of own cane hedged. So the market dropped when we started to hedge for '19/'20 up to today, but because of the devaluation of the real vis-à-vis the dollar, this price of BRL 1,187 is not much lower than the screen that we have today. And I would like to say that predominantly, it's around 12 cents and not 10 cents as you see in the first screen of the futures. So '19/'20, it is close to 12 with an exchange rate higher than BRL 4, which gives us a price of around 1,050, 1,100 depending on the screen that I'm hedging.
On the next slide, we talk about the ethanol market, which is an important part of the company's strategy for the next few quarters. Given the volume of inventory and production that we have, we see the parity of hydrous vis-à-vis gasoline in the southeast, and it has been dropping in the last few months: 70% in February '18 and now 59%, lower than the parity, and with the consumption of ethanol vis-à-vis gasoline. And what we see on the pie chart is a market share of hydrous going up, 11 percentage points, growing from 26% from January to June '17 to 37% from January to July 2018.
On the first chart, you see the consumption of ethanol per month. We see that in June and July, consumption changed going to close to 2.5 billion liters per month, and the price of June '18 to July '18 dropped about 8%. And we understand that this drop confirms a few factors. The first one is the capacity of ethanol with the sector. So we do not have a lot of tankage of ethanol, and most of the mills are producing more ethanol, as you know, and with a very accelerated crop. And at a point in time, you have to sell the ethanol because you do not have ways to store it. So this is one of the factors.
And the second one is very well-known to all of you. Some mills need cash in the short run. So they need to sell ethanol in order to pay their payroll and suppliers, so they have to sell at any price.
And also, the third factor, I would say that it is a little bit a matter of -- well, besides working capital that is something that everybody looks at, the banks have as a guarantee the ethanol inventory and they really force the mills to sell in order to settle their receivables with the banks. And even with the price pressure that we saw from June '18 to July '18, you can see that the price of ethanol today is quite higher than the same period of the previous crop year. You can see that in July '17, the price of ethanol, average price, was BRL 1,371 per cubic meter and now it is BRL 1,152 (sic) [ BRL 1,572 ] per cubic meters, and we expect this price to remain at this level for the next few months.
So we do not expect a [ varied ] price hike in the next 2, 3 months. And the price should start to improve after the October crop because the movement will be similar to the previous crop. And the most important thing here is that when you look at the parity in June '17 when it was a very low price for the production of ethanol, it was 67%; and now, with a low price, it is lower than 60%. And this should encourage the consumption of ethanol further, so with the lower inventory in the tanks and the prices improving. It should end in mid-October, as I mentioned before, at the beginning of our call, given the very dry climate as you can see in the region, and we might have a shortfall, even higher than what we have in the initial figures estimated. São Martinho believes that the crop shouldn't be much higher than 550 million tons of sugar. So even if we see a production of ethanol and sugar and volume of sugarcane higher than last year, the big question is that the crop has to end and there is no more sugar, no more cane to be crushed and then we will see this at the end of the crop.
So these are my initial remarks. So I would like to receive your questions now. Thank you for your attention.
[Operator Instructions] Thomas Budoya, Itau BBA.
My question has to do with your inventories of ethanol. Felipe, I would like to understand because you said 60%, 65% to be sold in the second half, and that -- this is what you usually do. I would like to know if this is the maximum capacity that you have and what you could carry over to the second half. And regarding the tankers of the sectors, do you have any estimates about the tankage capacity of the sector? And how long could it take for the prices to go up in the inter-crop period because of the high volumes of inventory now during the crop?
Thank you. The tankage capacity, 70% of the total production for São Martinho for ethanol. So this is the maximum that we can store. Mid-October, the last week of September, São Martinho need to start to sell ethanol because then we will have no more storage room to store ethanol. And this is what we were saying here, selling 60%, 65% in the second half. For the sector, well, the figure is not very simple because it really depends on the mix of each one of the mills. However, I can say that it is quite lower than São Martinho. It would be close to 14 million liters tops of capacity, tankage capacity.
Lucas Ferreira, JP Morgan.
Felipe, my question is about ethanol in the second half. If I'm looking at the inventory figures that we have been trying to make an adjustment for demand and also regarding parity or because of a longer intercrop period, this is the year in which the production of ethanol went up very steeply. And do you believe the parity will continue to be low? And how do you evaluate the risk? Because this year, we have elections, and this is the first year of elections in which you have the Petrobrás formula. So you believe that there will be a further depreciation of the real and an additional pressure on the prices of ethanol. So do you believe there is this risk and in terms of carrying this inventory over? And another question about your debt. Looking ahead, I believe that your indebtedness will drop quite steeply. And will you be able to pay a higher dividend, and when? And would you go back to discussing a more formal dividend payout policy?
Lucas, thank you for the questions. Starting with ethanol, as I said before, parity could be low, close to 58%, 60% for the next few months and August, September and the first half of October. But after that, I understand the price should react. Maybe it will not go up proportionately as it did last crop year, but the average price, vis-à-vis the previous year, the average price should be higher. I don't know whether it's going to be 15% higher, 20% higher, but higher. In the case of São Martinho, in the first quarter, I had an average price of ethanol, showed, for instance, in Goiás and hydrous ethanol in São Paulo hydrous, on average, I showed ethanol in the first quarter that is historically weak at BRL 1,137 per cubic meter and we expect that for the year, we will be able to have BRL 1,800 or BRL 1,850 per cubic meter. This was not very aggressive if you look at the price of the ethanol today. So that the parity and less than the average price of BRL 1,727, we are talking about 6%, 7% higher than what we had in the first quarter. In summary, the price tends to go up, maybe not at the same magnitude as it did last year, but for São Martinho, given the characteristics of the ethanol we produce more in hydrous and in Goiás with the tax benefit, then we would have a higher average price than the previous crop. And the last question about our indebtedness, we should be generating cash in this crop, major cash and even in sugar. You can see that our average price should be higher than BRL 1,100 and you have the future numbers in the release. So both ethanol and sugar should bring us an important cash generation. In the pipeline, we do not have any major investments in order to increase our crushing, neither organically nor in M&A. So we will probably do this via dividend or share buyback at 1.5x net debt/EBITDA is quite comfortable. And less than that, we believe there would be no sense in having that. I don't remember your other question. Could you repeat it?
You have already discussed this in the past. I mean, the dividend payout policy.
Well, in the past, we have discussed that, in the recent past, and we have not yet published anything about it. We are still discussing this at the Board of Directors level. And at the end of the crop year, if we do not have any big projections or any bigger use for cash, we should put in place a more aggressive dividend policy. But for the time being, well, for last year, BRL 180 million. And we are going to pay this tomorrow in fact. And we bought almost BRL 200 million in shares. That the total payment for shareholders was something close to BRL 370 million in the previous crop year. And the idea is that be it from share buyback or dividend, we reach this kind of level to remunerate our shareholders. Thank you.
Thiago Duarte, BTG Pactual.
I would like to ask 2 questions. The first one has to do with the precatórios or the preorders for the credit notes. We are still in the dark regarding that because we understand the remarks that you published and the release and the income statement, and we know that there isn't a lot that you can do about it because it depends on the publication in the official newspaper and also the position of Copersucar. But maybe you could give us an update. I believe that the first tranche, that already has the preorders issued. You should be receiving the first installment this year. So my question is whether you have already received it? I believe you have not. And then the second tranche, do you have any update regarding the issuance of these preorders that we believe would start to be paid as of next year? So maybe you could give us some color. Of course, you did talk about that in your balance sheet and in the income statement. Now, regarding the crop. Last year, you told us how much was your target of average prices and you were taking a very aggressive position and a very aggressive position to sell ethanol at the end of the crop year. So you had an average price for ethanol, I believe that it was BRL 1,730. And when you talk about the price increase, do you believe that the price will be higher this year? Hypothetically, let's say 10% vis-à-vis talking about BRL 1,850 or BRL 1,900. So would you work with this kind of figure, this level of figure if you were in our shoes for the next 6 to 9 months? So it would be very interesting to know your target in terms of your budget.
Thiago, good afternoon, and thank you for the questions. I would like to start by the last one because it's easier. Our target is BRL 1,850, give or take, in hydrous São Paulo Goiás. And we had BRL 1,727 in the first quarter and for the average of the year, for all the ethanol, we intend to have something close to BRL 1,850 per cubic meter. This is more or less what we are looking for. Regarding the preorders, the [ credit note ], the first one was already issued. And it was something close to BRL 700 million. And the precatórios paid 15% this year, 2018, with 5 installments as of 2019, equal installments. The money was deposited judicially, but it was not [ made ] by Copersucar yet. So there is a legal question regarding making it cash, and then Copersucar will transfer this to the members of the cooperative, and we expect this to happen by the end of September. Should it occur by the end of September, then we would be posting this installment in the second quarter. In relation to the preorders, it has not been published yet. The issuance of the preorder has not been published yet. So there is a legal issue involved. So we do -- cannot give you any color about when this will be published. As soon as the preorders are published and they become public, once they are published, they will get into the budget of the Union. Then 15% in 2019 plus 5 installments in 2020. But this has not been published yet in Diário Oficial or the official publication of the federal government. As soon as we have something about it, Copersucar will inform us, and as soon as we are informed by Copersucar, of course, we are going to inform the market. Our biggest difficulty there is because the preorder is not ours; it is a Copersucar preorder and then Copersucar convey the information to us. If it were something of São Martinho, our communication would become much easier. But as there is a third party in the middle, Copersucar, unfortunately, we have a limitation regarding what I know and what I can say. But so far, everything is okay. The first preorder, well, the money should come this year. And the major chance of having the second preorder being received in 2019 and the process itself has already become final. Of course, you have the restrictions and everything that is very common in this kind of process. But looking at the 6, 7, 9 years, of course, the money will be totally received by us.
Márcio Montes, Banco do Brasil.
About the TRS, 131.9, do you believe it's going to be lower than vis-à-vis Unica? And do you believe it will be recovered over the next quarter, that it will finish in October? And regarding your CapEx...
Just a second, please. I'm looking at the Unica TRS here. There's something you have to keep in mind. You have the TRS for the products and you have the TRS for sugar or for the cane. You cannot compare it on the same base. So this is one point. You have to look at the Unica base and our base, so that I can answer more effectively. But the TRS of Unica is a TRS that considers many different mills in different regions and different environments. There is one in Goiás that is quite representative. And maybe it's creating a little bit difference here in the average. But as we are growing the TRS year-on-year and the TRS that we put in the guidance today, based on the 40% production of the crushing that I have already done, my TRS is a little bit better than the guidance, 2 kilos more than what we put in the guidance as the weather is dry. So it's a little bit better. And now as far as Unica is concerned, I cannot say right now because I have to compare region by region to see if my mills are better or worse than Unica. And could you repeat your other question?
Your expectation for the renewed CapEx?
In the same proportion, this has not changed, BRL 900 million more or less with the planting of cane, treatment and the maintenance of the intercrop period.
Gustavo Allevato, Santander.
Felipe, I have 2 questions. Are you adopting any measures to mitigate price risks with a potential hedge for the sale of ethanol? And my second question has to do with CapEx. You've got BRL 27 million. What can we expect for the whole year?
Gustavo, thank you for the question. BRL 100 million for the full year answering your second question. You have the question of the COA, the project of automation, agricultural automation, the COA. And the hedge that we are having for ethanol, unfortunately, the market of hedging at the BM&F doesn't have a lot of liquidity. So we are not taking any measures for that. It's different from sugar, which you can hedge. For ethanol, there is no liquidity. So we are not hedging for ethanol. Of course, we are studying in order to have a hedge with oil. However, the variation of oil is different from the variation of ethanol for the producer. So we have a team studying what we can do about it. But so far, we have not decided anything. Thank you.
Lucas Ferreira, JP Morgan.
The follow-up, Felipe, what is your outlook for the cost of the next crop year? Minimum freight and have you already quantified that? Do you have an estimate in million reals? And how much additional expenditures could be brought to the company as other additional costs?
When you talk about the next crop, are you talking about '18/'19?
Yes, I believe so.
For the '18/'19 crop year, the minimum freight issue has a very little impact on us. First because all the transportation of cane, which we do today and which is a big volume of the utilization of trucks, they are our own. So we have already in-sourced this many years ago. So it's 100% ours. The trucks that we use to take the sugar from the mills to deliver to the ports is very small because most of our sugar goes via railway because we do have the [ orders siding ] inside the mill. There is a very short stretch in Iracema, but it's not relevant. And for the next crop, likewise. But of course, we are going to analyze and if we see that there is an opportunity to in-source transportation instead of contracting freight, we are going to in-source it for transportation of sugar from Santa Cruz and to Iracema, which is where we distribute the sugar. In relation to the cost for this crop, there is no big cost pressure. Diesel is even lower than we budgeted because of the freeze of the diesel prices. And the only thing bad about this crop is the crushing that we have of only 20.5 million tons. So our costs should be much lower than the one I'm having now, the -- if I had 23 million tons for the next crop, supposing rainfall is normal during summer and the beginning of the crop, if I can go back to a level of crushing close to 22 million, 23 million tons, then my costs will be further diluted and then I will have a great gain in terms of production costs for the next crop. So we had a big impact of the very dry weather on this crop. So this means a non-realization of the crop improvement that we were expecting due to all the investments that we have been making in planting the sugarcane and the improvements and the acquisition of harvesters, et cetera. If you look at the CapEx of São Martinho and you look at the improvement at the mills, in a good year, in terms of yield, our average is almost 90 per hectare and our cost would be even lower than the one I have today. And for this crop, we cannot have a lower cost. And this is what you have there for the first quarter. For the next crop, supposing rainfall levels come to normal levels, then we will have a major improvement in our costs.
Leandro Fontanesi, Bradesco BBI.
I have a question about the direct sales of ethanol to gas stations, to fuel stations. So could you give us an update about that? And would the company be interested in that? And as you said that you use mainly railway transportation, how would this work for you? That is to say the direct sales, maybe you would be buying trucks or something?
This is being discussed at the Congress if I'm not mistaken, to see whether they approve or not this law. For São Martinho, we understand that at the first moment, this wouldn't make a lot of sense to sell directly because to sell ethanol directly, you must have scale. And regardless of having the law or not, today, I can set up a distribution company and I can do that. But in order to do that, we have already carried out some in-house studies and in order to have scale -- you have to have scale in order to be profitable. And if this law is approved, then we will go back to that and reanalyze it. But we do not see this as a major upside for São Martinho.
But do you believe this is going to pass or...
Well, we don't know because this is in the hands of Congress. And Unica has already said that they are against this measure, and they want to remain with a sale by means of a few distributors. So this is it, okay?
[Operator Instructions] Now we close the Q&A session, and we would like to give the floor back to Mr. Felipe Vicchiato for his closing remarks.
Thank you very much for participating in our call. And if you have any doubts, our team will be available to you. Thank you.
São Martinho conference call is closed. We thank you for participating and wish you a good afternoon.